Test Bank: Chapter 13 Valuing Stock Options: The Black-Scholes-Merton Model The Black-Scholes-Merton model assumes (circle one) (a) The return from the stock in a short period of time is lognormal (b) The stock price at a future time is lognormal (c) The stock price at a future time is normal (d) None of the above The Black-Scholes and Merton pathbreaking papers on stock option pricing were published in (circle one) (a) 1983 (b) 1984 (c) 1974 (d) 1973 Volatility can be defined as (circle one) (a) The standard deviation of the return, measured with continuous compounding, in one year (b) The variance of the return, measured with continuous compounding, in one year (c) The standard deviation of the stock price in one year (d) The variance of the stock price in one year A stock price is $100 Volatility is estimated to be 20% per year What is the an estimate of the standard deviation of the change in the stock price in one week (circle one) (a) $0.38 (b) $2.77 (c) $3.02 (d) $0.76 In the Black-Scholes-Merton option pricing formula N(d1) denotes (circle one) (a) The area under a normal distribution from zero to d1 (b) The area under a normal distribution up to d1 (c) The area under a normal distribution beyond d1 (d) The area under the normal distribution between -d1 and d1 When there are dividends (circle one) (a) It is never optimal to exercise a call option early (b) It can be optimal to exercise a call option at any time (c) It is only ever optimal to exercise a call option immediately after an exdividend date (d) None of the above For equities it is usually assumed that the number of trading days in the year is (a) 365 (b) 252 (c) 262 (d) 272 The risk-free rate is 5% and the expected return on a stock is 12% A derivative can be valued by (circle one) (a) Assuming that the expected growth rate for the stock price is 13% and discounting the expected payoff at 12% (b) Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12% (c) Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5% (d) Assuming that the expected growth rate for the stock price is 13% and discounting the expected payoff at 5% When there are two dividends on a stock, Black’s approximation sets the value of an American call option equal to (circle one) (a) The value of a European option maturing just before the first dividend (b) The value of a European option maturing just before the second dividend (c) The greater of the values in (a) and (b) (d) None of the above 10 The VIX index measures (circle one) (a) Implied volatilities for stock options trading on the CBOE (b) Historical volatilities for stock options trading on CBOE (c) Implied volatilities for options trading on the S&P 500 index (d) Historical volatilities for options trading on the S&P 500 index ... 5% and the expected return on a stock is 12% A derivative can be valued by (circle one) (a) Assuming that the expected growth rate for the stock price is 13% and discounting the expected payoff... is 13% and discounting the expected payoff at 5% When there are two dividends on a stock, Black’s approximation sets the value of an American call option equal to (circle one) (a) The value of. .. for the stock price is 5% and discounting the expected payoff at 12% (c) Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5% (d) Assuming that